How Can I Create a Leave Travel Allowance Policy for Tax Exemption Benefits?

Hi,

I have joined a company, and my boss is asking me to create a policy so that seniors in our company can benefit from the tax exemption for leave travel allowance. I would like to request you to please provide me with a solution for this.

Dear Ankita, a policy provides a common ground of understanding and clarification to all employees. Please find below information that will help you draft and implement a policy.

Leave Travel Allowance

Leave Travel Allowance is one of the best tax-saving tools that an employee can avail of. It is a tax exemption offered by employers to their employees. Leave Travel Allowance, as the name suggests, is an allowance paid to the employee by the employer when the former is traveling with their family or alone. The amount paid as Leave Travel Allowance is tax-free. The exemption is restricted only to the travel cost incurred by the employee. The tax exemption is not valid for the costs incurred during the entire trip, which might include expenses such as food expenses, shopping expenses, and other expenses. The exemption is not available for more than two children of the individual born after October 01, 1998. Exemption is allowed for only two travels within a block of four years. The current block is between 2014-2017. If the individual doesn’t take advantage of the exemption within this block, they can carry it over to the next block. Employers usually don’t have to submit proof of travel to tax authorities while assessing travel allowance claims. Even though it is not considered mandatory for employers to collect proof of travel from the employees, they still have the right to demand documentary proof if needed. The employee is advised to keep proof of their travel, such as boarding passes, flight tickets, invoices of travel agents, duty passes, and other documentary proof, in case the assessing officer or the employer demands it.

Travel Limitations under Leave Travel Allowance

Leave Travel Allowance covers only domestic travel and does not cover international travel. The mode of travel should be either air travel, railway, or public mode of transport. Before you consider claiming LTA, you are advised to check your pay structure. The LTA amount can vary from one employee to another; however, if you are eligible for LTA, you will need to produce tickets/bills as per the criteria and submit the same to your employer. Every company will formally announce the dates for LTA claims. You will then need to fill in the applicable forms, attach the documents such as travel tickets, boarding passes, etc., and send them out to your HR or accounts team. An employee will need to make the LTA claim before the employer makes the final calculation for tax liability.

Applicable LTA Deductions

Based on the salary structure, you can claim LTA exemption only to a certain extent. The LTA can be claimed under the following circumstances:

- Travel by air: When the destination is connected by air, the exemption is allowed for ticket fares of a national airline's economy class.
- Travel by train: When the destination is also connected by train, the exemption is allowed for AC first-class tickets.
- Travel by other modes of transport: If the destination is not connected by air or rail, an amount equivalent to first-class, deluxe, or AC first-class fare, whichever is lower, can be claimed for exemption under LTA.

The LTA deductions will be considered only for the shortest route to the destination and back. If an employee is entitled to an LTA amount of Rs.30,000 but he/she has claimed only Rs.20,000, the applicable LTA deduction will be for Rs.20,000, and the remaining Rs.10,000 will be added to your income, which will be accountable for tax liability.

Hope this information is enough to draft a policy.

Regards, Sapana

Dear Ankita,

The fellow member (Ms. Sapana) has clearly explained the LTA points (process, criteria, limitation, etc.). I would like to add why your seniors are looking for tax exemption only on LTA. Though LTA is a very good and acceptable mode of tax exemption, there could be more options. Have you considered those points as well?

Additional Clarifications on LTA

The exemption is restricted to only two surviving children (unless, of course, the second birth has resulted in multiple children like twins or triplets).

LTA covers travel for yourself and your family. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if your spouse is working), and children.

If your family travels without you, no LTA can be claimed. You have to make the trip.

LTA is not related to when you started your employment. The government fixes blocks of years. These blocks are as per calendar years (January 1 to December 31). The current block period is between 2014-2017 (as stated by Ms. Sapana as well).

Generally, in a block period, for tax exemption, an employee is entitled to two LTA claims. In most cases, the tax exemption is allowed only against the submission of proofs, which seems justified. Otherwise, how will you calculate the traveling amount only? (In our company, the travel proof is a must for tax exemption). Though the employee can claim the LTA as per his/her requirement, the tax exemption will be allowed only for two claims in a block period. The amount of the excess journey (beyond two) will be countable for Income Tax in the F.Y.

The employee can claim two years' LTA in a year and can submit adequate proofs to get tax exemption. If the proofs are lower than the LTA amount, then the balance will be countable for taxable income in the F.Y.

But you cannot claim two years' separate journeys in one year. This means the proofs must be related to one journey to get tax exemption in a single claim.

One LTA can be carried forward into the next block period (for tax exemption), but it needs to be claimed in the first year of the next block period. For example, if you do not take your LTA in 2014-17, or you avail only one LTA, then you will be able to take the pending LTA in 2018. This means, in the 2018-2021 block, you will be entitled to three journeys.

Even if you switch jobs, you can get the LTA not only from your present organization but also from your former employer if the concession is lying unutilized for the block period.

The LTA can be claimed only if you applied for leave and have actually traveled. There are two separate processes for taking LTA and availing of the tax benefits. To take the amount in advance, the employee needs to apply in the LTA Advance Form. To avail of the tax exemption, the employee needs to submit an LTA declaration. The declaration should comprise family details (as per eligibility, who took the journey), traveling cost, and related traveling bills.

In case both you and your spouse are working, if you claim any LTA journey, then your spouse will not be able to claim the same holiday traveling cost from his/her employer unless, of course, you go for another holiday and he/she claims it.

Last but not least, I would like to suggest you do homework to refine the points (my points and Ms. Sapana's points). Some points may have been repeated, or there may be some contradictions. The material is too long; you need to re-draft it to frame a proper policy.

I have also taken the points from the site itself but tried my best to narrate it properly and not to repeat the points as suggested by Ms. Sapana.

I think it is more than enough to cover the topic.